Wm. Blair expects in-line Q3 for RCL, sees little Ebola impact

Royal Caribbean is expected to report Q3 results on Oct. 23.

William Blair analyst Sharon Zackfia predicts an approximate 4% increase in constant-currency net yields, in line with the company's guidance and an acceleration from Q2's 2.6% increase on bookings strength in Europe and China. 

She sees the potential for net cruise costs, excluding fuel, to be lower than guidance for flat to up 1%. There was little change in fuel cost or weighted average currency during the quarter.

William Blair's price checks suggest Royal Caribbean pricing was fairly volatile in July and August before strengthening in September, with improving trends continuing in October despite concerns about the Ebola outbreak, Zackfia said. Pricing for early 2015 Caribbean sailings stands out, with the most solid pricing trends in at least 18 months, she added.

Zackfia thinks Royal Caribbean will reiterate or narrow toward the high end its full-year constant-currency net yield expectations of 2% to 3%, compared to William Blair's 2.8%. The brokerage said there could be a modest increase in the full-year EPS guidance of $3.40 to $3.50, versus the $3.50 consensus and the brokerage's $3.51 estimate.

For Q4, Zackfia forecasts a 4.5% to 5% increase in net yields and EPS of 44 cents, above implied guidance of 33 cents to 43 cents but under the 48-cent consensus. Lower fuel costs may save 2 cents to 3 cents per share, offsetting the penny- to 2-cent penalty from a stronger dollar.

Citing the stronger dollar, William Blair shaved a nickel from its 2015 estimate, and now forecasts EPS of $4.56, 3 cents lower than consensus.

'Our estimate is predicated on a 2% constant-currency yield increase, which we believe is prudent at this juncture given the uncertainty surrounding the global macro environment as well as the potential for Ebola fears to escalate,' Zackfia said.

There is not much historical guidance to go on, she added, since SARS broke out at the same time as the invasion of Iraq in the first half of 2003. Yet despite those two issues yield trends improved in 2003 over 200, though holding slightly negative against depressed post-9/11 trends.

RCL shares fell about 15% over the past month, 'likely on concerns about how and if the Ebola outbreak will affect consumers’ willingness to cruise,' Zackfia said. 'While no time is a good time for a medical outbreak, the current Ebola concerns are occurring during what is a relatively low seasonal booking time for the cruise industry, which may be the primary reason why we have not heard Ebola as a major concern yet in the travel agent channel.'

Things might be different if it were wave season.  

Looking past Ebola, William Blair remains positive about Royal Caribbean management's plans to double earnings and regain double-digit return on invested capital by 2017.

The brokerage rates RCL 'outperform.'

Shares closed at $56.61 Tuesday, up $1.26.